A week or two ago, the Wall Street Journal had an interview with Anna Schwartz in which she blamed the current financial situation on the artificially low interest rates created by the Federal Reserve in the early years of the new millennium:
How did we get into this mess in the first place? As in the 1920s, the current “disturbance” started with a “mania.” But manias always have a cause. “If you investigate individually the manias that the market has so dubbed over the years, in every case, it was expansive monetary policy that generated the boom in an asset.
“The particular asset varied from one boom to another. But the basic underlying propagator was too-easy monetary policy and too-low interest rates that induced ordinary people to say, well, it’s so cheap to acquire whatever is the object of desire in an asset boom, and go ahead and acquire that object. And then of course if monetary policy tightens, the boom collapses.”
The house-price boom began with the very low interest rates in the early years of this decade under former Fed Chairman Alan Greenspan.
Schwartz is the co-author of one of the most respected and influential works on the causes of the Great Depression, a work whose thesis has been endorsed by now Fed Chairman Ben Bernanke (money quote: “Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”) Her opinion on the matter thus cannot be dismissed out of hand. And, for what it’s worth, Alan Greenspan’s recent repudiation of capitalism makes more sense on the assumption that he was trying to deflect blame from himself.
Nevertheless, “the blame it on the fed” line of argument has been largely absent from the punditocracy and the popular press. There have been plenty of attempts to prove that some government action, such as the CRA or the backing of Fannie and Freddie, was behind the housing bubble. But fed policy, if it’s mentioned at all, is generally only tacked on as an afterthought.
I don’t know whether Fed policy was responsible for creating the housing bubble (my guess is that it played a role, though whether this was decisive I can’t say). Yet the absence of this line of attack on the part of many conservatives and free marketeers in favor of less plausible scapegoats is strange. I can think of a couple of possible explanations here:
1. Conservatives are racists and hate the poor, and thus are predisposed to believe explanations that blame the crisis on the poor and/or minorities. Possible. Perhaps even likely in some cases. I don’t believe in ascribing such low motives to people, however, if their actions can plausibly be explained i some other way.
2. Blaming the Fed doesn’t get Republicans off the hook. Blaming Fed policy for the crisis means blaming Greenspan. And while Greenspan was appointed Fed chair by both Democrats and Republicans (indeed, the actions that would have gotten us into trouble occurred during a term he was appointed to by Bill Clinton), he is identified much more with the Republican party. He’s also so associated with free markets in many people’s minds that to blame him would seem to a lot of folks like a condemnation of markets, even if it was anything but (David Friedman’s remarks on politicians who claim to favor smaller government would seem applicable here).
3. It’s too complicated. “Government forced banks to lend to people with no money” is easy to understand, even if it isn’t true. Talk about “greed,” “deregulation,” etc. is likewise easy to do. Explaining how lowering interest rates could lead to overinvestment in the housing industry, by contrast, is hard to fit into a soundbite.
4. There’s no obvious solution. If you think that the problem was caused by Fannie and Freddie, then the answer is to get rid of Fannie and Freddie. If the problem was “deregulation” then the answer must be more regulation. But if the problem was with the Fed, then what? A return to the gold standard? Should Bernanke give another speech saying “okay, so we caused that one too. But, uh, we won’t do it again. And this time we really mean it”? You might be able to get Congress to give you $700 billion dollars no questions asked by using some aggressive sales tactics, but if Paulson and Bernanke had come to Congress and said “we must return to free banking within 48 hours or the planet will expolode!” I somehow think it wouldn’t have worked.
I’m sure there are other possible explanations that I’m missing. Thoughts?
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